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Kenyon Limited Partnership v. 1372 Kenyon Street Northwest Tenants' Association

September 3, 2009

KENYON LIMITED PARTNERSHIP, ET AL., APPELLANTS,
v.
1372 KENYON STREET NORTHWEST TENANTS' ASSOCIATION, ET AL., APPELLEES.



Appeals from the Superior Court of the District of Columbia (05-CA-1236 & 06-CA-1017) (Hon. Robert E. Morin, Trial Judge).

The opinion of the court was delivered by: Ruiz, Associate Judge

Argued April 30, 2008

Before RUIZ, Associate Judge, and TERRY and FARRELL,*fn1 Senior Judges.

This appeal stems from a contract dispute between a tenants' association and the investors who entered into partnership with the association in order to take advantage of special accelerated depreciation rules for investments in low income housing. We conclude that under the financing agreement between the association and the partnership, the association had a right to purchase the building at a price calculated in accordance with the terms of the agreement, and that the evidence supported the trial court's finding that it was solvent and thus capable of enforcing the right to do so. We, therefore, affirm the trial court's judgment setting the purchase price at $584,132 for "good, clear and marketable title," and declaring that the association is entitled to "specific performance of the purchase-and-sale agreement created" when the tenants' association exercised its option to purchase.

I.

Appellants are Kenyon Limited Partnership and various entities controlled by appellant Andrew Namrow ("KLP").*fn2 Through his interest in these entities, Namrow owns 95.5% of an eighteen-unit apartment building located at 1372 Kenyon Street, Northwest. The members of the 1372 Kenyon Street, N.W., Tenants' Association (appellees) live in this building.

The tenants' association originally owned the apartment building, which provides low-income housing. On September 23, 1982, the tenants' association entered into a Transfer, Lease and Option Agreement ("TLOA") with various investors, including appellants Multiple and Phoenix, in order to obtain funds to rehabilitate the building.*fn3 The purpose of the agreement was to form a partnership, KLP, between the tenants' association and the investors. In exchange for the investors' capital contribution of approximately $400,000, the association transferred title to the property to KLP.*fn4 As a result, the investors, as partners of KLP, could derive a substantial tax benefit through accelerated depreciation on low-income properties that Section 167 (k) of the Internal Revenue Code permitted at the time.*fn5 The partnership, in turn, was able to negotiate a purchase money mortgage on the property in the amount of $904,500 to complete the needed repairs on the building.

The tenants' association's expert, Gary Pokrant, explained that the purpose of section 167 (k) was to encourage investment in low-income rental housing by allowing investors to deduct the cost of the property's depreciation over a shortened sixty months instead of over its normal depreciable life.*fn6 See I.R.C. § 167 (k)(1). In exchange for the tax benefit, the Internal Revenue Code limited the market appreciation that the investors may realize by capping the sale price of the property. As a primary purpose of the agreement, the TLOA anticipated this kind of sale to the tenants' association after the investors had taken the tax benefits as a primary purpose of the agreement. ("WHEREAS, the Association will have the option to purchase the Property at the end of the lease term at as advantageous a price as Section 167 (k)(2)(B)(iii) of the Internal Revenue Code will allow.")

The parties specified the conditions and terms of such a sale. After title to the property transferred to KLP, the property was to be leased to the tenants' association for twenty years. Upon termination of the lease, the association had the option to purchase back the property. Paragraph 11 of the TLOA provides:

11. Association's Option to Purchase

A. The association shall have the right to purchase all of the Partnership's right, title and interest in the Leased Premises effective upon termination of this Lease at the end of its Term, in accordance with the following terms and conditions:

(1) The purchase price shall be One Million Five Hundred Thousand Dollars ($1,500,000), plus the amount of any outstanding deed of trust thereon, which amount the parties agree is a reasonable projection of the expected fair market value of the Property at that time, taking into account anticipated physical depreciation of the improvements as well as expectations regarding inflation and interest rates.

(2) The purchase price shall be payable in cash at settlement, except that the portion of the purchase price attributable to outstanding deeds of trust may be paid by the Association assuming the balance due thereon, if approved by the holders of the deeds of trust.

(3) Notice of intent to exercise the purchase option must be given not later than six (6) months prior to the end of the Term of the Lease.

(4) It is the belief of the parties that the transactions contemplated by this Lease are of the sort contemplated by Section 167(k)(2)(B) of the Internal Revenue Code, . . . and that the transaction can meet the technical requirements of Section 167 (k)(2)(B)(iii), depending upon the amount of the purchase price referred to in subparagraph (A)(1) above. Further, it is the desire and intent of the parties that the Association and the individual tenants of the Property obtain the advantage of the purchase price lower than that set forth in subparagraph (A)(1) above if, but only if, the Partnership is able to enjoy the benefits of Section 167 and of operating loss deductions with respect to the Property. Accordingly, and notwithstanding the provisions of subparagraph (A)(1), it is agreed that unless the Internal Revenue Service or a court of competent jurisdiction has ruled or held that the Partnership is not entitled to enjoy the benefits of Section 167 and of operating loss deductions with respect to the Property, the purchase price referred to in subparagraph (A)(1) shall be reduced to the highest price which will assure that the requirement of Section 167(k)(2)(B)(iii) are met.

(emphasis added).

At some point after the advantageous tax provision had lapsed, Namrow offered to buy the investors' interest in KLP for $20,000, but he testified that, in the end, he paid nothing for it "[b]ecause at the settlement table, the [original partners] deemed that it wasn't worth $20,000."*fn7 Other than the 0.5% interest held by the tenants' association, Namrow "maintain[ed] that [he is now] the owner of Kenyon Limited Partnership." Namrow acknowledged that by the time he took over KLP, the investors had already taken all the allowable accelerated depreciation deductions, and that he "knew what [he] was coming [into]." He claimed that he had not benefitted from the accelerated depreciation scheme.*fn8

The trial court found that after he acquired KLP, Namrow refinanced the purchase money mortgage for KLP in February 2004. Although he did not take out any cash from the deal, Namrow claims that he and his wife personally guaranteed the mortgage in order to obtain a lower interest rate.*fn9

In August of 2004, at the end of the twenty-year lease term, the tenants' association notified Namrow that it would be exercising the option provided in the TLOA to purchase the property. Namrow rejected the association's offer to purchase.*fn10 The tenants' association filed suit for breach of contract in February 2005, requesting that the court uphold its right to purchase the property at the price of $584,132, pursuant to Paragraph 11 (A)(4) of the TLOA. In February 2006, KLP filed its own suit, asking the trial court to declare that the tenants' association was insolvent. After the trial court consolidated the two cases, the parties cross-moved for partial summary judgment only on the issue of the association's right to purchase the property. In the order granting summary judgment to the tenants' association, the trial court ruled that the association had an option to purchase the property under Paragraph 11 of the TLOA. Noting that "[KLP had] not disputed the option price, only that the Association does not have an exercisable option," the ...


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